IRS Begins Hospital Community Benefit Compliance Initiative
by David Flynn, Duane Morris LLP, Philadelphia, PA
The IRS recently began a new information gathering initiative relating to compliance by tax-exempt hospitals with the “community benefit ” standard. The community benefit standard has served as the primary legal standard for determining whether nonprofit hospitals qualify for tax-exempt status as organizations described in section 501(c)(3) of the Internal Revenue Code for more than 35 years (since the publication of Revenue Ruling 69-545). The IRS is in the process of mailing a new “Compliance Check Questionnaire, Tax-Exempt Hospitals” (IRS Form 13790 (May 2006)) to some 545 tax-exempt hospitals. The questionnaire asks each hospital to respond to a long list of questions relating to operations conducted in its most recently completed tax year.
The community benefit standard established in Rev. Rul. 69-545 identifies several criteria important to section 501(c)(3) qualification for general acute care hospitals, such as a community-based board without financial interests in the institution, a full-time emergency room open to all without regard to ability to pay, an open medical staff policy, treatment of Medicare and Medicaid patients without discrimination, and appropriate mission-related use of net earnings. None of these criteria is essential in every case; rather, an overall facts and circumstances analysis is used to determine qualification (in addition to satisfaction of the usual section 501(c)(3) requirements, such as operating for the benefit of the public, and avoiding private inurement/private benefit, political campaign involvement and excessive lobbying).
The project under which the questionnaire is being circulated has been described by the IRS in informal guidance as a compliance check, and not an examination. It appears intended to serve primarily as a learning experience for the IRS, although no promises are being made about what the eventual outcome or use of the results of the project might be. The questionnaire is primarily aimed at eliciting information that would determine whether a tax-exempt hospital has engaged in activities that demonstrate compliance with the standard formulation of the community benefit standard as initially presented in IRS Revenue Ruling 69-545. The questions are reasonably detailed and far-ranging, and include inquiries concerning types of services provided by the hospital, mix of patients, details concerning emergency room operations, specifics concerning the composition and meeting practices of the board of directors, medical staff privileges, the basis upon which any medical research is conducted and made available to the public, professional medical education and training activities, a significant segment on charity or uncompensated care (including the treatment of bad debts and other related matters), billing practices (covered extensively), and programs offered to the community (e.g., medical screening, immunization, educational and other programs).
The Compliance Check Questionnaire can be accessed on www.irs.gov, clicking on “Charities & Non-Profits,” and then clicking again on “EO Hospital Questionnaire.”
The last two pages of the nine-page questionnaire ask reasonably focused questions about compensation practices, presumably developed from the results of the IRS’ Exempt Organization Compensation Enforcement Project which began in August, 2004 (which consisted of a “soft” contact program involving some 1,200 compliance checks, and an additional 600 single-issue examinations, all focused on reporting of compensation on Forms 990 for 2002). One matter that may create some difficulty in the preparation of responses to this portion of the questionnaire is that information is requested relating to the compensation of all persons who are “disqualified persons” under the intermediate sanctions rules (e.g., board members, CEOs, CFOs, other officers, persons with substantial influence over the hospital’s operations, and a very broadly-defined group of “family members” of those otherwise identified as “disqualified persons”). See, §4958(f)(1)-(4) of the Internal Revenue Code, and the related provisions in the regulations. While it is a simple matter to identify board members and certain senior administrative officers as constituting “disqualified persons” for this purpose, the definition of “disqualified person” is much broader, and it may be difficult to identify all persons who are to be included.
Because of the reasonably arcane legal terms and definitions incorporated into the questionnaire, it would be advisable to have proposed responses reviewed (if not developed) in consultation with counsel.